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Hidden Strength of Spain’s Growth

Inflation in Spain continues to contract. In February, the annual pace of inflation came in at -1.1%, above the previous month’s figure of -1.3%, as well as exceeding estimates for -1.5%. Over the last two years, the inflation figure has fallen from near 4% to current levels. Slight increases in the price of gas aided the stronger inflation figure last month.

“Preliminary figures for February came better than market expectations due to higher gasoline and diesel prices. Yet, the inflation rate has been negative since July of 2014. Alpha reported. On a monthly basis, consumer prices rose 0.2 percent in February, rebounding from a 1.6 percent fall in January, according to Trading Economics.

Meanwhile, economic growth in the country has been steadily growing since 2012. In the fourth quarter, economic growth came in at 2.0%, above the previous month’s reading of 1.6%, while in line with estimates.

Since reaching annual contraction of close to 4% during the financial crisis, growth has rebounded to current levels, shown below. Consumer spending and more disposable income due to falling consumer prices are cited as reasons for the strong growth figure.

“Spain’s Finance Minister Luis de Guindos and private-sector economists cite a strong recovery in consumer spending as a key driver for Spain, as households resume purchases after years of paying off debt, and as lower energy prices and rising employment – close to half a million jobs were created last year – are leading to more disposable income,” according to the Wall Street Journal.

Lastly, as the economy strengthened, business confidence broadly improved in the country. In February, the business confidence figure came in at -4.8, above the previous month’s revised reading of -5.1, as well as exceeding estimates for -5. Since 2009, business confidence has improved from readings near -40, to current levels.

While headline inflation readings in Spain are currently contracting, the underlying economy looks strong. Low energy prices are aiding consumers, leading to increased consumer spending measures. This has benefited overall economic growth. With the ECB embarking on a landmark stimulus campaign, Spain’s equity market should benefit, while the euro remains under selling pressure.